WSJ: Tellurian Has Held Talks With Chesapeake Energy on Louisiana Fields

Houston-based Tellurian seeking to become producer of natural gas with Haynesville assets

Stephanie Yang / Updated March 8, 2018 5:24 p.m. ET

Tellurian Inc. is in talks to buy Chesapeake Energy Corp.’s Louisiana drilling fields as it seeks to become a producer as well as exporter of natural gas, according to people familiar with the matter.

Chesapeake, a pioneer of the shale boom, has been selling off some of the vast holdings assembled by its late co-founder Aubrey McClendon as it struggles with low energy prices and a mountain of debt it took on to lock up drilling rights for swaths of land.

Tellurian is the latest venture by Charif Souki, who developed the first terminals to liquefy natural gas and export it from the U.S. Gulf Coast as founder of Cheniere Energy Inc. The company, which has few assets, has said it is looking to acquire drilling fields near a coastal site where it plans to build an export facility, to sell fuel overseas.

Chesapeake’s Louisiana fields, located in the Haynesville shale formation, are valued at about $2 billion, according to Jefferies analysts.

The talks to purchase Chesapeake’s fields could fall apart and there is no guarantee of an agreement. Tellurian has offered to Chesapeake to take equity as a part of the asset sale, something Chesapeake isn’t interested in doing, people familiar with the talks said.

Tellurian has also held talks with other producers with Haynesville assets to acquire more acreage, people familiar with the matter say. Tellurian’s stock closed up 1.5%, at $8.55 per share, Thursday and is down about 25% on the year.

The advent of shale drilling has flooded the U.S. with cheap energy, including vast resources of natural gas that producers have sought to export to generate electricity and heat homes around the world.

Mr. Souki founded Tellurian in 2016 after being ousted as chief executive of Cheniere in 2015. Cheniere sent the first shipment of liquefied natural gas from the mainland U.S. in 2016, after Congress lifted a ban on U.S. energy exports in late 2015.

At Tellurian, Mr. Souki is again trying to build out U.S. capabilities to send natural gas abroad, but additionally offering investors a stake in the full supply chain by owning producing assets along with pipeline and liquefaction capacity.

The strategy could potentially make it easier to raise capital to construct a multibillion-dollar export terminal, but it isn’t without risks. Tellurian will have to prove it can produce gas as cheaply as other operators who have years of experience.

By some estimates, Tellurian would have to become one the 25 largest natural gas producers in the U.S. to supply all the fuel it would need for its terminal.

“You have to find a business model that applies to the expensive financing of a project,” Mr. Souki said at the IHS Markit CERAWeek conference in Houston on Wednesday.

Last year, Tellurian acquired acreage in northern Louisiana for $85 million that currently produces about four million cubic feet of natural gas a day. Driftwood LNG is expected to start construction in 2019, pending regulatory approval.

In a February earnings call, Chesapeake executives pointed to opportunities to sell gas assets from its portfolio and reiterated plans to reduce debt by up to $3 billion this year through large transactions.

“Gas is extremely out of favor in the equity markets, as you all know, and extremely out of favor in many circles,” said Chesapeake Chief Financial Officer Domenic J. Dell’Osso Jr. on the call, but added, “there is real financial return to be created in these assets.”

Write to Christopher M. Matthews at christopher.matthews@wsj.com and Stephanie Yang at stephanie.yang@wsj.com

Tellurian is touting the ability to source natural gas from their reserves (drilling units) for $2.25/mcf. If that gas is used for LNG export instead of being sold on the open market, will royalty interests in those units receive payment that is less than fair market value? Will Tellurian deduct post production costs from $2.25? What will be the net price paid to royalty interests? I suggest that there are questions yet to be answered about how an end user owning the reserves and funding the development will compensate their mineral lessors for their portion of the gas produced. I don't think we should depend on Tellurian having the same incentives as pure E&P companies. Tellurian may not care about capitalizing step out exploration. The Tellurian business model would appear to work best by picking up distressed assets at a discount.

That is because the gas is being sold, not used to make LNG. The Tellurian LNG facility will not be completed and capable of exports until 2022. Once operations begin, the gas will not be sold on the open market.

It may very well be that losing Chesapeake and getting Tellurian as your operator will be like going from the frying pan into the fire.

The leases already exist. The statement to which you refer is for each individual lessor in these units to answer for themselves. If they have a no cost royalty that is currently being honored, then maybe Tellurian will honor it also. If a lessor does not have a no cost royalty or one that is not properly written to stand up in court, they will be subject to whatever post production charges Tellurian imposes. All that is knowable at this point is that Tellurian is touting a $2.25 all in cost to the cryogenic units as their cost before liquifaction.

Tellurian can hire an operating company. It is not widely recognized that all the Indigo companies (Minerals, Resources and Haynesville) have a contract operator managing the drilling of their wells. Then again, Tellurian may just create an in-house department to operate wells in their units when the time comes for them to take their gas instead of sell it.

That's the one I was thinking of; I was mistaken when I said it was in Sabine Parish, and it is 4 new wells, not 5. Regardless, the application for 4 new wells indicates that they intend to drill. They may contract out operations, but I spoke to one of Tellurian's officers last fall when their acquisition was announced, and he swore up and down that Tellurian intends to operate its own wells. Time will tell if they intend to drill or not.

Thanks for the clarification, Andrew. In the past, when new deep-pockets money comes to the table with a buy-in, I've seen similar "drill it" activity, even for those that are not known to be spudders. There seems to be a go-get-it macho attitude when such a company owns a drill-able leasehold.

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